What to Do When Your Retirement Goal Is Too High

How much should you really be saving for retirement? Is a cool $1 million enough to support you in retirement? Your retirement goal might be too high. 

CNBC, for example, recently described how $2 million may not be enough for a comfortable retirement, and Fortune recently described how $3 million is the new rule of thumb for retirement.

Find the Best IRA Accounts

Invest today for more retirement savings tomorrow.

When the median American household income is less than $70,000, talking about retirement goals in the millions seems impossibly high. Someone earning $70,000 a year would have to put every dime they make away for 30 years to have saved $2.1 million dollars, and that person is earning more than the median American household.

Some people try to achieve this anyway by over saving for retirement. Others throw up their hands and don’t worry about it at all. Here’s why the best solution might just be somewhere in the middle.

In this article

    What to do if your retirement goal is too high

    Remember Social Security

    The vast majority of Americans are in line to receive some level of Social Security benefits when they retire. While these benefits are usually not enough to provide the standard of living that we may want in retirement, it is enough to provide a significant portion of that standard of living.

    Take a few moments to visit the Social Security Administration website and find a summary of your benefits, which should include an estimate of your monthly benefit in retirement. Multiply that by 12 and you’ll have your annual retirement benefit, which you can then include in your retirement calculations. For example, if you want to have $50,000 a year in retirement income and Social Security will provide $20,000 of that, then you really only need to save enough to provide $30,000 in additional income, providing a much lower target. 

    Remember compound interest

    Another important factor to consider is the compounded growth of your investments. If you assume that a well-diversified investment should grow at an annual rate of 7% while inflation remains at 2% per year, your money in retirement savings should expand significantly by the time you retire, significantly beating inflation.

    For example, if you have $100,000 in retirement savings today and you intend to tap it in 20 years, it will grow to $387,000. Even if you adjust that amount for inflation, it will still be worth $260,000 in today’s dollars. For more modeling like this, take a look at the compound interest calculator available from the US Securities and Exchange Commission.

    The key here is to invest early and invest aggressively when you’re young, dialing back that aggression as you grow older. That’s the recipe for smart retirement investing.

    Remember matching contributions

    Another factor you may be overlooking is the impact of matching contributions from your employer. Many workplace retirement plans feature matching contributions from employers, offering a big additional bonus that many employees may overlook in their retirement calculations.

    If your workplace retirement plan offers matching at any level, there’s almost nothing more effective you can do with your money than to contribute enough to retirement to get every drop of those matching funds — and it’s not over saving for retirement, it’s a quick way to add 50% to the value of your money or even double it, depending on how your employer matches.

    For example, many employers will match employee contributions dollar for dollar up to 6% of an employer’s salary. If you earn $50,000 a year and contribute $3,000 to your retirement plan, that means your employer will also contribute $3,000, immediately turning your total annual contribution to $6,000. If you’re doing this early in your career, the power of compound interest turns this into an enormous gain.

    Remember IRAs, pensions, and other assets

    It’s not just your workplace retirement plan that will make a big difference when you retire. You may have other retirement plans, like state pension programs, available to you. You may also have other assets, like your IRA account.

    Starting an IRA is one of the best financial moves you can make for retirement, especially if a workplace retirement plan isn’t available to you. If you’re a high-income earner — over $120,000 a year — a traditional IRA is a good choice. If you earn less than that, you get an even better deal — a Roth IRA, from which you can make withdrawals tax-free in retirement. As with the other options mentioned here, the earlier in your career you contribute, the better, so that compound interest can really start working for you.

    Think about realistic retirement spending

    One more element to consider is how much you’ll really be spending each year once you retire. Most households spend significantly less once the income-earning members of the household are in retirement, with their annual spending dropping by at least 20%, according to Fidelity. If your retirement calculations center around maintaining your current spending level, consider that you won’t be commuting, buying work clothes and eating out nearly as much. You might find that your retirement goal isn’t high at all, but right on the money.

    What to do if you feel like you’re saving too much for retirement

    Many people who have spent years saving aggressively for retirement may find that, once they consider those aspects of retirement savings, they’re actually saving too much for retirement. While dialing down your retirement contributions might seem like the right move here, there are a few other factors to consider.

    Consider the possibility of early retirement

    If you’re in excellent shape for a normal retirement, consider whether you can step away from your career earlier than expected. If you’re in great shape to retire at age 65, perhaps you can retire at age 60 or even age 55? 

    Is early retirement a good idea, though? For many, retirement isn’t about spending your final years idle, but instead is an opportunity for a second act, a window to explore areas of your life that you didn’t have the opportunity to explore before. Early retirement can actually mean productive years when you don’t have to worry at all about income and instead do what is meaningful to you.

    Consider coasting

    Another approach to consider is the coasting strategy for early retirement, which means that you save aggressively for retirement until you reach a point where your retirement savings will grow on their own to the level you want in retirement, then you simply stop saving. 

    For example, let’s say you earn $80,000 a year, but you bank $30,000 of it for retirement and live on $50,000 a year. At age 45, you reach a level of retirement savings where, if you contribute nothing else at all, you’ll have enough in your accounts at age 65 to live exactly how you want. At that point, you can turn off retirement contributions entirely, which gives you a lot of financial freedom at that point. You can change careers or use the extra income for some big life projects you’ve always dreamed about while you’re still young.

    Make sure you’re fine in the worst-case scenario

    If neither of these really appeal to you, you may be the type of person who wants to prepare for the worst-case scenario, having plenty of money in retirement so that almost nothing can derail it. If that’s your scenario, spend some time figuring out what that worst-case scenario really looks like. You might want to have a big sum in retirement, and that’s great, but how big is really enough?

    We welcome your feedback on this article. Contact us at inquiries@thesimpledollar.com with comments or questions.

    Trent Hamm

    Founder & Columnist

    Trent Hamm founded The Simple Dollar in 2006 and still writes a daily column on personal finance. He’s the author of three books published by Simon & Schuster and Financial Times Press, has contributed to Business Insider, US News & World Report, Yahoo Finance, and Lifehacker, and his financial advice has been featured in The New York Times, TIME, Forbes, The Guardian, and elsewhere.

    Reviewed by

    • Courtney Mihocik
      Courtney Mihocik
      Loans Editor

      Courtney Mihocik is an editor at The Simple Dollar who specializes in personal loans, student loans, auto loans, and debt consolidation loans. She is a former writer and contributing editor to Interest.com, PersonalLoans.org, and elsewhere.